Douglas Carswell's Blog

Osbrown economics won't work

And so it goes on.  The Chancellor, George Osborne, speaking at Mansion House has promised to keep giving the economy more of what made it ill;  a multi billion pound injection of cheap credit. High doses of low interest rates.  More print-money-and-pray.  Abstinence from any serious supply side reform.

Far from bold and different, this is essentially the same approach taken by his predecessor, Gordon Brown.

After two years of “continuity Brown” attempts to engineer growth, Britain is back in a double dip recession.  Manufacturing output is falling.  The old remedies do not work.  Stronger doses of the same stimulus medicine will not either.

It is time for a fundamentally different approach.

Back in 1976, Labour Prime Minister, Jim Callaghan, famously came to recognise that the old Keynesian orthodoxy was dead. "We used to think that you could spend your way out of a recession" he declared. But "that option no longer exists."

Callaghan could see not only that fiscal stimulus did not work. It made things worse.  Britain today needs a Chancellor who can recognise not only that the fiscal stimulus approach does not work.  The monetary stimulus won't, either.

To heal a sick patient, first do no harm.

For all the talk about responsibility, the government is, in everything but name, running a massive fiscal stimulus - a throw-back to the pre-Callaghan era. Ed Balls may not agree, but there is no other way to describe a situation in which the government spends £100 billion more than it takes in taxes every year to prop up economic output.  As a consequence, the Coalition will be borrowing more in five years than Gordon Brown managed in thirteen.

You do not help "deleverage" a debt crisis by doubling the size of public debts.  The government needs to actually live within the tax base.

Secondly, the government should stop sloshing easy credit around in the belief that it can make us rich. It needs to tighten monetary policy instead.

If you fix the price of any product artificially low, you might have a short term glut, but eventually the supply dries up.  By setting the price of credit - interest rates - so low, that is what has happened to credit.  We today have a shortage of real credit in the system because for years there has been so little incentive to save.

When the government promises billions of pounds “to support the flow of credit”, they are in effect rationing something that their own policies have put in short supply.

Pumping government-backed credit into them will do nothing to sort out the zombie banks.  It will instead make them more reliant on crony corporatism and state subsidy. Which part of the economy did that ever fix?

“But reining in excessive government spending and raising interest rates would clobber demand!” you say. “And as all the Treasury experts know, if demand falls there would be a downturn”.

By “experts”, perhaps you mean those same people who failed to see the crunch coming?  Maybe like in the late 1970s, the experts' orthodoxy is wrong?

Years of easy credit has caused a chronic problem of malinvestment, which all those “experts” mistook for growth.  Much of the Brown era growth turns out to be froth. No amount of faux credit will make it real.

Post-Brown, we are in a world of least worst options.  Either we can accept that after years of reckless credit boom there must inevitably follow a short, painful contraction - only after which can there be a return to prosperity.  Or alternatively we can opt for a period of stagnation stretching on indefinitely for years - perhaps decades.

Easy credit has masked Britain’s decline in underlying competitiveness for years.  Too much taxation, red tape and too many restrictive practices are holding back wealth creation .

Rather than dishing out more debt, George Osborne ought to focus on a deregulation revolution.  Smaller businesses should be exempt from whole swathes of rules and compliance regulation.  Wealth creators should no longer have to seek permission to produce wealth from parasitical state quangos.

A few years ago, Germany quietly deregulated part time work, allowing people to take on “mini jobs” without having to pay so many taxes.  German unemployment keeps falling and her economy growing.

“But Britain is competitive” you insist “ we still do rather well in some of those international league tables”.

Alas, such measures of competitiveness gauge the economy that we have, not the economic activity we no longer have thanks to years of monetary mismanagement.  Our economy is pretty efficiently geared to allowing you to go on a credit-fuelled shopping spree.  It is less geared towards producing things.  Perhaps the way we have managed the money might help explain why we seem to have built a lot more shopping malls, rather than factories?

“Credibility” George Osborne said at Mansion House “is hard won and easily lost”.  Indeed.

In the late 1980s, without a credible free market approach to money and credit, we drifted away from high monetarism – the idea that government should control the money supply – and into the Exchange Rate Mechanism.  Remember how that turned out?

Without a coherent free market view today, we will continue to treat the end of a long term credit bubble as though it were just another cyclical downturn.

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